Cineverse Corp (CNVS) 2010 Q4 法說會逐字稿

Good day, everyone, and welcome to the Cinedigm Digital Cinema Corporation fourth quarter and fiscal year 2010 earnings conference call. Today's call is being recorded. Listeners are cautioned that some of the material discussed today may include forward-looking statements regarding Cinedigm's business and expected financial results. Words like anticipate, believe, estimate, or expect are generally forward-looking statements. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable. They are based on information currently available and certain functions and there can be no assurances that they will prove correct. You should not rely on anything in these forward-looking statements as a promise or a representation as to the future results. You are encouraged to read the Company's Securities and Exchange Commission filings. Now I would like to turn the presentation over to your host for today's call, Mr. Bud Mayo, Chief Executive Officer.

Thank you, operator, and good morning, everyone, and thanks for joining us for Cinedigm's fiscal 2010 and fourth quarter investor conference call. With me today are Adam Mizel, our CFO and Chief Strategy Officer, and Brian Pflug, our Senior Vice President of Accounting and Finance. Sorry about that Brian. On this morning's call I will highlight the great progress we've made during the past fiscal year, setting the stage for our next fiscal year to be the best in our more than ten year history using the most important metric of all, cash flow. I'll then pass the call to Adam, who will update you on our recent refinancing of our Phase 1 debt, the $47 million credit facility we announced in May and the results of the quarter. When Adam is finished, I will have a few concluding remarks and then open the call for your questions. First, let me start with our Phase 2 deployment plan. In Q4 we installed 109 digital cinema systems and signed 779 more, bringing our total Phase 2 signed and financed screens to 1543 at year-end.

As of today the total is growing. And that total is now installed Phase 2 625 and total signed 1644. Upon installation each of these screens generate immediate as well as long-term cash flows from service fees, as well as additional revenue opportunities for software, content delivery and distribution. Our current active pipeline is for more than an additional estimated 3,000 screens, which would bring to us more than 8,000 screens between Phase 1 and Phase 2 when signed and installed. Our plan is for the combination of Phases 1 and 2 to reach about 14,000 screens by the fall of 2012. I'll return to this subject shortly. An extremely important element of our Phase 1 and Phase 2 deployment plans is financing. Last month we made two major announcements in this area. First, on May 6th we announced the completion of $172 million non-recourse financing, a refinancing of all of our existing senior and mezzanine debt in the Company's Phase 1 deployment subsidiary.

Later in the month, on May 26th, we announced a $35 million addition to a previously announced Phase 2 credit facility, which now totals $47 million. The $47 million is being used to finance 750 digital cinema systems at four significant exhibiter circuits. Adam will provide more information on each of these financings shortly. I want to point out that of the Phase 2 1644 screens signed as of today, 876 were financed by exhibitors themselves and managed by Cinedigm for activation and service fees. Moving on, our content and entertainment segment, which includes the Cinedigm Entertainment Group, or what we call CEG, and Unique Screen Media, or USM, had a full year of firsts. Last June, CEG distributed their first feature movie, "The Narrows", which included an interactive live Q&A with the cast using our proprietary cine-live network. During this Q&A audience members at theaters around the country were able to text questions to several of the actors from the movie, who answered them from a location in New York City.

For a P&A distribution budget of roughly $1 million CEG expanded its use of this network with a virtual red carpet premier and Q&A for the independent movie "Opa!". This larger independent feature distribution had a live Q&A sent via satellite to 56 Cinedigm theater locations, followed a week later by a release to more than 200 theaters. We continue to share in downstream revenues throughout the life of that movie, which is now being distributed internationally. These two independent features are excellent examples of the need for a program that CEG has developed called the Million Dollar Movie. The name of the program refers to our ability to ensure a theatrical release a quality independent movie for a P&A budget of about $1 million.

We anticipate that the program will enable CEG to more effectively market to dependent producers, combining all of Cinedigm's unique capabilities, CEG's distribution and marketing expertise, USM's advertising, our proprietary distribution software, satellite network and digital cinema platform. We launched the program to an audience of filmmakers in April on a panel that we developed for the Tribeca Film Festival titled Digital Cinema Learning and Loving the New Distribution Paradigm. The development of our digital cinema network, combined with the convergence of our technology and services and our growing capabilities in movie and alternative content distribution, are key components of the future value creation that we envision for shareholders. We continue to capitalize on the growing demand for 3-D content.

Our expertise in live 3-D events was demonstrated again in early April when CEG brought the NCAA men's final four and championship games to theaters live in 3-D, sponsored by LG and CBS sports. The final game of the tournament played on more than 60 screens and outgrossed every other feature in those theaters that day. This kind of success has created continuing demand by exhibitors and sponsors for more events. CEG also distributed two 3-D concerts during the past six months. The first in December was the Dave Matthews Band concert called Larger Than Life. This event was booked in more than 500 theaters throughout the nation for a one-week run. The second was Phish 3D. This was the most successful CEG distribution thus far. This event had a sneak preview in nine cities on Tuesday, April 20th, which sold out almost everywhere within hours of tickets going on sale.

And in most theaters it outsold all of the other features combined for the entire day. It was then booked at more than 200 theaters for its one week only run and actually held over for a second week in about a third of those theaters. At our advertising subsidiary, USM, we've set the stage for improved performance in the past year. A new VP of Advertising is in place, who is leading the charge for improving efficiency. We're seeing expanded penetration of national advertising among our theaters and a newly developed web advertising program that is set to launch this summer. All of these efforts will assist us in capitalizing on the improving economic environment. And now at this point I will pause and hand the call over the Adam.

Thank you, Bud. The recently completed fiscal fourth quarter is typically our seasonally weakest financial quarter due to slower studio release patterns post the holiday season, which in turn leads to a smaller quarterly screen turnover. In addition, the local advertising market also declined seasonally post the Christmas spending rush and this year, uniquely, deployments ramped up late in the quarter as we added exhibitors to the Phase 2 post the holidays. We took advantage of this period to complete the restructuring of our balance sheet with our Phase 1 refinancing, to focus on expanding our Phase 2 sales pipeline, to continue to develop various Phase 2 financing solutions, and to position our business units for improved performance in fiscal year 2011. First, on May 6th we announced the completion of our refinancing of our existing senior non-recourse Phase 1 credit facility and our non-recourse spender mezzanine debt to a single Moody's Ba1 rated institutional debt facility.

This new six-year term loan facility provides Cinedigm Digital Funding 1, our non-recourse bankruptcy remote subsidiary, with significantly improved terms, including a reduction in the interest rate to three-month LIBOR plus 350 basis points with a 1.75% floor or currently 5.25%. Previously we paid LIBOR plus 650 basis points with a 2% floor or 8.5%. And, in fact, with our swap costs at the time, over 10%. We also took advantage of the current uncertain credit market conditions to execute a swap that caps our LIBOR rate at 2.16% from June, 2011 through June, 2013. In addition, due to the combination of this lower interest rate level and the more flexible financial covenants, we expect Cinedigm Digital Cinema Services will earn its full Phase 1 service fees of $2 million plus in fiscal year 2011 versus $1.2 million in fiscal year 2010. These fees are paid monthly. Prior to refinancing Cinedigm had chosen to forego much of this fee to ensure covenant compliance.

Finally, the refinancing has solidified our expected long-term Phase 2 financing model, which we worked with our existing senior lenders during the deployment period, akin to a warehouse line, and ultimately refinanced non-recourse Phase 2 debt in a similar lower cost institutional financing shortly after the completion of the deployment period. As we previously discussed, we signed commitment letters on October 28th for $100 million of non-recourse Phase 2 senior debt financing with GE Capital and Society Generale. These two commitments will finance up to 2133 screens in our Phase 2 deployment. The senior facility will be paired with mezzanine financing and exhibitor contributions to fund the rollout. We have mutually extended these commitments since that time, as we initially focused with GE and SG on the completion of our Phase 1 refinancings and more recently on securing the necessary mezzanine financing to pair with the senior commitments.

This delay has been purposeful by all parties, as we establish the warehouse refinancing model described above, completed other financings, and have sought to match the closing timing with the aggressive rollout of these screens in order to minimize the fees and expenses of an undrawn facility. As Bud mentioned earlier, we've been building our Phase 2 pipeline and are targeting a calendar Q3 or Q4 close and rollout. We have not stood still during this process. Cinedigm has added 880 screens to our deployment schedule since January 1st and currently has 1,644 screens signed up in Phase 2 and, as Bud mentioned earlier, an over 3,000 screen pipeline. To meet the financing needs of our signed exhibitors, we expanded our loan facility and partnership with Barco and KBC Bank by $35 million to $47 million. We expect to continue to add exhibitors seeking both the exhibitor buyer model and the Cinedigm provided non-recourse financing.

Overall, the Phase 1 deployment in which Cinedigm owns the residual cash flows currently earns all the EBITDA profit of the Company, $8.5 million in Q4 and $42 million for the year. However, this does not tell the full story as most of the expenses related to Phase 1 and phase 2 sit in our service Company and Cinedigm is maintaining a significant overhead investment to support the Phase 2 deployment program. We are approaching an important inflection point, as our non deployment business units produced year EBITDA breakeven this quarter with a cumulative EBITDA loss of $4.4 million through the first nine months of the fiscal year and a much improved loss of just $462,000 in the quarter. We believe the significant revenue and operating leverage inherent in our Phase 2 deployments over the next 12 months will drive us to positive cash flow.

To put in this perspective, we estimate that each incremental 1,000 Phase 2 screens deployed will produce $2 million to $2.5 million of annual incremental EBITDA to Cinedigm through service fees, software license and maintenance fees and incremental delivery fees based on our current customer base. I'll conclude my discussion of the quarter. As you may recall, earlier this year we changed our financial reporting structure in an effort to improve the transparency to investors and highlight the five (inaudible) segments of our business. These segments are described in greater detail in our 10-K, which will be filed shortly. Please note that our operating results for all periods now exclude our Pavilion Theater, which we have classified as held for sale as we explore sale opportunities. Our consolidated revenue for the fourth quarter ended March 31st, were $16.4 million, which represents a decrease of $139,000 or less than 1% from the prior year's fourth quarter. Excluding VPF revenues, revenues for the quarter increased by $85,000.

So first our assets heavy Phase 1 and Phase 2 deployment segments, which include the VPF revenues, expenses, EBITDA, Digital Cinema assets and non-recourse debt associated with the deployments, performed above expectations in the seasonally slow fiscal fourth quarter. As of March 31st, there was $163.3 million of remaining non-recourse debt at Phase 1, this is before the refinancing which we completed on May 6th, and trailing 12 months EBITDA of $42 million. We believe the present value of the cash flows and residual value of the equipment in Phase 1 approximates or exceeds the enterprise value of Cinedigm, assuming the 15% cost of capital of our Sageview notes. The modest reduction in Phase 1 quarterly year-over-year revenues from $10.4 million to $9.7 million was due to fewer titles released and modestly lower screen over, screen turnover primarily attributable to the "Avatar" effect we discussed last quarter. However, Phase 1 performed better than expectations.

We previously disclosed our belief that "Avatar" would have reduced VPF revenue by approximately $1.25 million, when in fact it only caused a $600,000 decline. This strong VPF trend has continued into our fiscal first quarter, as release patterns have been wider than our budgeted expectation. The other 10,000 screen Phase 2 deployment segment has a very similar VPF revenue structure tied to 13-year contracts with the movie studios and long-term use contracts with exhibitors. However, Phase 2 is a cost recoupment model in which VPF revenues cease once the accumulative cash flow receipts of Phase 2 have equaled the all-inclusive cost of the equipment financing and servicing. In Phase 2 Cinedigm is the servicer and has no residual ownership. As of March 31st, Phase 2 has $10 million of non-recourse debt.

We expect the non-recourse debt in Phase 2 to increase significantly in the next 12 months, as we accelerate our deployments with the recently announced additional borrowing ability from KBC, which expands that facility to $47 million and also from the up to $100 million senior lending GE SocGen facility. Phase 2 deployment revenues were $391,000 in the quarter versus $130,000 last year, as our -- due to our continued ramp-up in installations. We had a 336 screens installed at March, 2010 versus 54 at March, 2009. Our third segment is our services segment, which provides a variety of services to our Phase 1 and Phase 2 deployment, as well as to third party customers through Cinedigm Digital Cinema Services, DMS, our digital feature and trailer delivery service and our software division. These businesses produced a total of $10.1 million of revenues in the fiscal year, a 28% increase from last year, and are poised for further rapid growth in terms of both revenue and EBITDA as our Phase 2 deployments accelerate in fiscal year 2011.

Services segment revenues more than doubled at $3.8 million in our fourth quarter, as we earned $1.4 million of service revenues due to both the new Phase 2 screens deployed, as well as service fees earned from Phase 1 as a result of the above planned VPF performance. In addition, Phase 2 deployments generated increased software licensing fees and marginally higher DMS revenues as digital site count rose. This is the inherent operating leverage within our business model. Our fourth segment, content and entertainment, includes our pre show advertising business, Unique Screen Media, and our alternative content and independent film distribution arm, CEG. This segment produced $16 million of revenue in the fiscal year, down from $17.2 million last year. During the year we eliminated unprofitable advertising customer contracts and also experienced revenue declines due to the recession and the across-the-board reduction in advertising spending.

Our content and entertainment segment's quarterly revenues decreased 24%, primarily due to a 19% decline in revenues from our advertising business, 9% of which came from targeted reductions of nonprofitable customers, combined with lower local ad sales in the quarter and 10% resulting from lower noncash barter revenue recognized in the current period. Our overall adjusted EBITDA was nearly $8.4 million for the quarter, a 21% increase over last year's quarterly EBITDA of $6.9 million. The strong quarterly EBITDA performance versus the flat revenue comparison is due to the positive operating leverage embedded in the growth of our service fees and our continued focus on cost control. Among other things, beginning in the fiscal fourth quarter, we achieved an annualized $1 million of expense savings through health benefits and additional headcount consolidation. We will continue to actively manage our expense base and drive increasing margins.

Our services segment EBITDA has now turned positive before corporate allocation at $1.4 million of EBITDA last quarter versus a $42,000 loss last year. This is primarily due to increases in Phase 1 and Phase 2 service fees earned. Going forward increasing Phase 2 service fees and software license and maintenance fees for new deployment, as well as our Phase 1 service fees from existing deployments should improve these results. Also, DMS' EBITDA declined year-over-year due to a reduction in non theatrical revenues, which were impacted by the macroeconomy, a slower CEG release schedule in the fourth quarter, the ramp-up and costs associated with our trailer express weekly delivery, trailer delivery program. As industry-wide digital deployments increase, we benefit from several smaller studios recently added to trailer express and we roll out additional satellites, we expect strong incremental margins to improve these results in fiscal year 2011.

The content and entertainment segment generated an EBITDA loss of $542,000 this quarter. Although an improvement versus a loss of $1.1 million last year, even with the seasonally slow advertising quarter and both the NCAA final four broadcasts and Phish 3-D concerts slipping into our fiscal first quarter. Both USM CEG results should improve in our fiscal first quarter due to an improvement in local ad sales and rates, as well as a busier CEG release schedule in the quarter. Our direct operating costs continue to be carefully managed and are down nearly 12% from last year's fourth quarter and are 28% of revenues. Our resulting quarterly gross margin improved to 72% this year from 69% last year. Our overall selling, general, administrative expenses have continued to decline versus the quarterly period last year, dropping nearly 19% to end at 21% of revenues this year from 26% last year. We expect our cost base to stabilize at these lower levels and future increases, when they occur, to generally be tied to greater top-line growth rates.

The balance sheet reflects total cash and investments of $24.2 million, of which $15.1 million is restricted cash, representing the Sageview interest reserve we utilize to pay actual cash interest expense and the Phase 1 GE facility interest reserve. The total cash and investments of $24.2 million compared to total cash of $26.6 million at March 31st 2009. Finally, a few words on the current quarter ending January 30th. We expect the improvements in our operations and cash flows that were initially evidence in fiscal Q4 to continue. Service fees earned from our deployments and exhibitor buyers should grow with our refinancing complete, with a positive trend in the number of summer movie releases and the widening booking patterns, and our deployment quarter to date of 289 additional Phase 2 screens. As we have discussed, these deployments generate positive operating leverage with additional software license and maintenance fees and delivery fees.

Finally this quarter our content and entertainment businesses are experiencing improved local and national ad rates and a seasonally expected event release schedule. A reminder that in November, 2010 our contracted Phase 1 VPF rates with the six major studios will have their final step-down of 7%. Finally, as industry-wide Digital Cinema deployments expand, we expect to benefit accordingly and look forward to a year of continued improvement in our financial results and cash flows. Now let me pass the call back to Bud.

Thanks, Adam. Overall during the fourth quarter we've seen a major shift in momentum. Growth has returned to Cinedigm and we expect it to show itself in fiscal 2011 and beyond. Our balance sheet and cash flows are stronger. Our global leadership in digital cinema software and satellite delivery is continuing across all of our business units. The transformative effect of digital cinema is taking hold. And with well attended 3-D live events and week-long theatrical engagements of content that could not have made into it theaters five years ago. Now let me take a minute to share with you our strategy for the current fiscal year. First we plan to install at least 1500 more screens and sign thousands more from our more than 3,000 screen pipeline to be installed within 12 months of each of their signings. We'll expand our satellite network and continue to deliver content for major studios, as well as CEG's movies and alternative content over that network.

We'll continue to expand the use and functionality of our industry standard theater management software product, creating essentially a giant iPod in theater complexes throughout the world. We intend to improve our advertising business performance, add services to increase revenues and to use it to support an expanded slate of movies and alternative content, live and recorded, acquired and distributed by CEG. As I hope I have illustrated, this was quite a transition year for Cinedigm. But before moving on, I want to make two important points. The first is that all of what CEG does and all these high-profile events that we do are enabled by our proprietary digital cinema technology and our satellite and software infrastructures. Our Company is being regularly recognized, in fact, for this expertise. For example, in April we were tapped to bring a live 3-D feed of James Cameron to an environmental conference panel he addressed in Korea.

As we announced last week, we will be working with SENSIO, our partner in CineLive, to bring FIFA World Cup soccer to theaters around the word. The second point I want to make is that each time CEG brings an event to theaters, there's a waterfall of revenues to each of our business units because all of them are used. For example, when we released the Indy movie "Opa!", CEG received a distribution fee, a share of the box office and an interest in the downstream revenues of that movie. Our software division managed the back office and received fees for doing so. Our Phase 1 and Phase 2 subsidiaries were paid virtual print fees. Our digital media services division delivered the movie to theaters across the country by satellite and by hard drive. And finally, Unique Screen Media, USM, provided advertising for the movie across it's network of more than 2700 theater screens.

As we look strategically beyond this year, and we are, I want you to all to know that we've begun to explore the ways we can exploit our mission-critical software, delivery systems, and our 3-D advertising and content distribution experience. We viewed theaters as out-of-home venues for content and the capabilities we've developed over the years to serve theaters can be applied to additional out-of-home venues and networks. Our team looks forward to reporting our progress throughout the coming year. I thank you for your continued interest in Cinedigm, many of you for -- since we started the Company ten years ago. And now I will open the call for questions.

(Operator Instructions) Our first question is from Lee Giordano with Imperial Capital. Go ahead, please.

Hi, thanks. Good morning, everybody. I have a couple of questions here. I guess first off, could you touch on the screen turnover rates currently? It seems like obviously "Avatar" was in the theater longer than normal. What are you seeing overall as far as screen turnover with all these 3-D movies coming out? Is it actually shortening or is it actually accelerating?

This is Adam. Good morning, Lee. As we mentioned in our comments, we are seeing generally increasing turnover, both as the number of releases stabilizes over increases and the width or breadth of those releases is higher. For instance, during this quarter that we're in, "Iron Man 2" opened on a record number of our screens, almost 700 in Phase 1. And then only a couple weeks later, that was topped by Shrek that opened on well north of 800. As the studios continue to book, in particular their big tent pole releases, wider to maximize the return they get on that marking investment and we're seeing that as we sort of indicated, we are seeing a very strong quarter that we're in, in terms of turnover and ultimately revenues, both VPF and that translates to service fees.

Right. And then can you talk a little bit more about the growth of the live events business? And I know the World Cup is coming up. Can you talk a little bit about that and what you see as the potential for that business?

Well, the potential for international distribution of our content is enormous. We just touched the surface here with the FIFA World Cup, which will play on hundreds of screens all around the world, including some here in the United States. We've been chosen by FIFA to manage that entire process and really connect the dots for satellite providers all over the world and to architect the solution and to be there on site at South Africa for the games, the last eight, the last few of which will come here to the United States in selected markets. The opportunity is enormous and we're exploring numerous international opportunities. Everything we look at today in live 3-D we are thinking about the international market as well.

We've had several meetings just in the past few weeks about a variety of content, which it would be premature for me to discuss, but it is safe to say that the lineup is increasing. Sponsorships who are thrilled with the job that has been done for them and the deliverables connection with these, in particular 3-D TV manufacturers, but others as well who want to be associated with this new technology and most importantly to reach consumers who are in the theaters and go out of their way to see these really mind-bending events in many cases. They're just incredibly produced. We've also seen the improvement in the production values that have come with them over the past few years since we started back at the beginning of 2009.

Lee, there's a long list of events being recorded or being broadcast live in 3-D in particular with the advent of a variety of 3-D television channels and since there are very few 3-D TVs in the home and 3-D cable boxes, we're talking with almost all of them about bringing those to the theaters because it's the best way to monetize those events in the near-term and for the sponsors, which are typically the TV set manufacturers, at least one of the sponsors, to have that content seen by their target audience, men between 25 and 50 in a venue in which the picture is amazing and the quality is amazing, which is part of what they're trying to do to spur TV set sales. So I think there's a lot to come in that as these events occur over the remainder of this calendar year and into next year.

And how many theaters right now currently have satellite distribution capabilities?

Our cinelive network is just under 90 theaters at the moment and we'll be expanding that pretty significantly over the remainder of the year. As we announced we're going to double our satellite network. Right. And in doing that many, not all of those will be enabled with a live capable to additional technology and expense, but a number of them will in key markets that we think make sense and that we can monetize.

Great. And last question for Adam, just can you clarify again when for the 876 screens that are financed by exhibitors themselves do you recognize those VPF revenues on the income statement for those?

No. For screens that are financed by the exhibitors themselves we only recognize the services fees that we are paid. As we have talked in the past, typically an upfront $2,000 per screen installation activation fee, then typically 10% of the VPF revenues are paid to us as a service fee. That's all we recognize in our services Company for those exhibitor buyer financed screens.

Great, thanks a lot.

Sure.

(Operator Instructions) I'm showing no further questions at this time, sir. You may proceed.

Well, that's it, folks. And we want to thank you for your continued interest in Cinedigm. Stay tuned for some really exciting announcements and very interesting programming. And most of all, for continued improvement in our financial performance. Thank you all. Have a great day.

Ladies and gentlemen, thank you for your participation. That concludes the conference. You may disconnect and have a wonderful day.